LME aluminum prices have fallen about 40% from their 2022 high due to concerns about global economic growth, but analysts pointed out that aluminum prices may be "close to the bottom" as demand from the clean energy industry increases. Analysts and traders are increasingly bullish on the outlook for aluminum demand from emerging clean technologies.
Aluminum prices may bottom out
Three-month LME aluminium has fallen by almost a fifth since its peak in January and more than 40 per cent from last year's peak, largely due to economic weakness in Europe and the US and sluggish demand from China's construction sector. But many producers and traders are also increasingly optimistic about the price outlook for aluminium in the medium term, anticipating growing demand for the metal from makers of electric cars and solar panels. Aluminium prices this month experienced their biggest contango (contango) since the financial crisis, meaning forward prices are higher than prices for immediate delivery, underscoring weak physical demand.
"I think the aluminum cycle is near its bottom and if demand continues to improve in the coming weeks, the market could be off its lowest point of the year," said Colin Hamilton, an analyst at BMO.
Aluminum for three-month delivery on the LME traded at $2,170 a tonne on Tuesday, down from a peak of $3,840 a tonne last year.
Aluminium demand is weakest in Europe
A trader at a major trading firm said it expected aluminum prices to fall further from current levels by around $100- $150 a ton before bottoming out and then rising in the long term. From construction, beverage cans, solar panels, cars to aircraft, aluminum is used in a wide range of industrial activities.
"The global economy is slowing down," said Pal Kildemo, chief financial officer of European aluminum producer Norsk Hydro. "You have to remember that demand for aluminum products is closely linked to global GDP growth, and Europe is the weakest." Norsk Hydro has cut its forecast for a recovery in aluminium demand, which it now expects will not pick up until the first quarter of 2024 at the earliest.
CRU, an industry consultancy, has cut its forecasts for global aluminium consumption this year and next, saying it expects prices to fall further, while several leading banks have cut their price forecasts in recent weeks.
"The global aluminum market is expected to be oversupplied by a little over 800,000 tons this year, which will put pressure on prices," said Ross Strachan, aluminum analyst at CRU. "Demand growth was slower than expected in all major consumption regions." But there are signs that the market decline may be coming to an end as global aluminum inventories decline and the pessimism may begin to dissipate.
China is the bright spot in aluminum
China is currently the world's largest producer and consumer of aluminium, but it has become a bright spot as far as the aluminium market is concerned, as rising spending on clean energy infrastructure makes up for falling demand in the real estate sector.
"Chinese aluminium demand is hitting an all-time high," says Graeme Train, head of metals research at Trafigura, the trading house. Trafigura is one of the world's largest metals traders. "The price drop has also triggered some restocking demand."
Graeme Train says China's stimulus of energy infrastructure and strength in manufacturing have more than made up for weakness in the property market.
The solar market is particularly strong because solar farms often use aluminum as a frame. Electric vehicles also require more aluminum than traditional internal combustion engine vehicles, which is another source of aluminum demand growth in the medium term. China's aluminium imports rose 20 per cent year on year in July, according to data released by China's customs bureau.
But the analyst said that so far, this strong demand has had little impact on global aluminum prices, because China's domestic aluminum production is also rising and near record highs.
Those who have long been bullish on aluminium include Glencore. The company, which reached a $1.1 billion deal with Hydro earlier this year, is expanding its alumina refining and bauxite mining operations.
Outside of China, aluminum demand in Southeast Asia and the United States is helping to support the market, but European aluminum demand is much weaker.
Although about half of Europe's smelting capacity has been shut down due to high energy prices, the weakness in the European market has far outweighed the decline in production.
Data released by Hydro shows that in the second quarter of this year, European demand for extruded aluminum products fell 23% compared to the same period last year. Extruded products are a finished form of aluminum used in cars and appliances.
European companies have argued over Rusal's role
Meanwhile, in Europe, the debate over Russian aluminum's role in the market is growing. European producers such as Hydro have called for a ban on the use of Russian materials, but European governments have so far been reluctant to adopt similar measures. European manufacturers say free trade in aluminum needs to be maintained. In July, a letter from five European business associations called on the LME to resist calls to impose sanctions on Russian materials, saying doing so would hurt small and medium-sized downstream manufacturers.
Some traders said the current contango state of LME aluminium was partly due to an increase in Russian aluminium inventories in LME warehouses, as arbitrage traders were unwilling to take a loss on holding Russian material. High financing costs have also helped, as they make it more expensive to hold metal.
But even the most pessimistic market participants do not expect the current weak demand for aluminum to last forever.
"Over time, we expect that to change," Mr. Kildemo said.